Raging geopolitical flashpoints generally don’t represent a positive catalyst due to the underlying implications for economic instability. However, simmering tensions may cynically represent a growth opportunity for defense contractor RTX Corp (RTX). Additionally, a specific area of the consumer economy – traveling and experiences – is booming, thus benefiting RTX’s aerospace business unit. It’s a double-dipping of tailwinds, making me bullish on RTX stock.
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Positive Earnings Results Set Up a Strong Case for RTX Stock
The underlying enterprise’s strong second-quarter results set up the bullish narrative for RTX stock. As TipRanks reporter Shrilekha Pethe mentioned, the defense contractor posted adjusted earnings per share of $1.41. This figure represented a 9% lift from a year ago. As importantly, the print exceeded analysts’ estimate of $1.29.
On the top line, RTX generated revenue of $19.7 million, representing an 8% year-over-year increase. Here, too, the company beat Wall Street’s consensus target, which in this case was $19.3 billion. In Q2 of last year, RTX rang up sales of $18.32 billion, exceeding analysts’ estimates of $17.68 billion.
Moreover, following the second quarter results, RTX’s management raised its outlook for Fiscal 2024, anticipating adjusted EPS to land between $5.35 and $5.45. Previously, the leadership team guided for $5.25 to $5.40. As for sales, RTX anticipates $78.75 million and $79.5 million. The prior forecast called for revenue between $78 billion and $79 billion.
Now, the most important detail could be the breakdown of Q2 sales. As Pethe mentioned, RTX’s sales growth stemmed largely from its strong aerospace sector, particularly robust commercial sales. “The increase in commercial sales is due to airlines using older aircraft to meet the growing travel demand caused by a shortage of new jets. This situation has boosted RTX’s aftermarket business.”
A Fundamental Double-Dip
One factor for bullishness toward RTX stock relates to rising global tension. For example, Russia’s invasion of Ukraine started in 2022 and shows no sign of abating. Moreover, U.S. involvement in the conflict’s implications represents a major talking point in the presidential election and a growth catalyst for the company.
More recently, concerns about Iran’s potential military action against Israel raised anxieties regarding a global escalation. Although cooler heads apparently prevail due to diplomatic efforts, the U.S. still sends naval forces to the Middle East. It’s still well within the realm of possibility that tensions could erupt.
Although geopolitical tensions are always good business for defense contractors, it’s worth noting that RTX stock is also an investment in robust civilian endeavors. The company is now facing a situation where it could benefit from two disparate catalysts. In fact, strong and sustained travel demand implies that RTX’s civilian aerospace business may continue to thrive.
Following the paradigm-shifting disruption of the COVID-19 pandemic, the phenomenon known as revenge travel sprouted. While the desperate need to get out of the house has faded, in its place is a prioritization of experiential expenditures: everyday people (perhaps realizing that life is short) are earmarking their budget for vacations and other fun occasions.
That sentiment doesn’t appear to be diminishing. If anything, travel demand may be stronger than critics gave it credit for. This dynamic should be a net positive for RTX stock. Combined with the geopolitical catalyst, it’s no surprise that shares have been flying high this year.
Contextually Reasonable Valuation
If there is a noticeable criticism of RTX stock, it may be its valuation. Currently, shares trade hands at 2.2x trailing-year revenue, partly thanks to the trailing-month performance of over 15%. This multiple is modestly elevated compared to the aerospace and defense industry’s average price-to-sales ratio of 1.72x.
Still, that’s not the end-all, be-all of RTX stock. Analysts are looking for Fiscal 2024 sales to reach $79.52 billion, with a high-side estimate of $80.08 billion. In this case, the optimistic view is not unreasonable. Since Q4 2023, RTX has beaten the Street’s revenue estimates. Combined with catalysts in the civilian and defense components of the business, the aerospace specialist appears attractive in context.
Wall Street’s Take on RTX Corp
Turning to Wall Street, RTX stock has a Hold consensus rating based on three Buys, five Holds, and one Sell rating. The average RTX price target is $118.56, implying a 1.45% upside potential.
The Takeaway: Double the Trouble, Double the Fun for RTX Stock
As stated at the beginning, I am bullish on RTX. It’s one of the world’s biggest defense contractors, and increasing tension in the geopolitical realm keeps its stock high. Cynically, global conflicts seem to bolster the business. However, the global travel boom in the aftermath of the pandemic has also helped RTX stock in the non-military category. Overall, these two factors contribute to a contextually attractive narrative.
